Economics, public policy, monetary policy, financial regulation, with a New Zealand perspective

Sometimes I wonder….

There is always plenty in the newspapers to disagree with, but over the last couple of days a couple of pieces from the Herald particularly caught my eye.

On Wednesday there was an editorial supporting a focus on reducing government debt rather than tax cuts. It culminated in this paragraph

The economy continues to enjoy stronger growth than most in the wake of the crisis more than seven years ago. With continuing high net migration gains, good numbers of tourists and rising returns from non-dairy exports, notably beef and wine, next week’s Budget will present a bright picture. It needs to do something more to contain house prices but that problem, too, is a symptom of economic success. New Zealand is attractive to migrants and investment because much of the world is so slow to finally recover from the crisis. When they do, our fortunes could change.

Where to start? As I’ve pointed out before there is nothing impressive about New Zealand’s growth or productivity record even since the 2008/09 recession – we had a serious recession, actually a double-dip in 2010 too, and have since had a sluggish recovery. Headline GDP growth rates haven’t been bad by international terms, but per capita growth – surely what counts – remains unimpressively weak. And for all the talk about some individual sub-sectors doing well in exporting, per capita tradables sector production is no higher now than it was 15 years ago.

And then there is the Prime Minister’s talking point – house prices are a symptom of economic success. Well, no. They are a symptom of regulatory failure, compounded by an immigration policy that draws in lots of people – not even to a successful city, but one where GDP per capita has been falling, relative to the rest of the country for 15 years. Moderately wealthy countries will never have trouble attracting migrants if they want them – there are always poorer places than us (eg, in the current New Zealand context, China, India and the Philippines). A better sign of economic success might be if the New Zealand diaspora started returning – but even last year, there was a (modest) net outflow of New Zealanders to Australia, an economy with its own problems.

I’m not sure what the editorial writer had in mind when he spoke of New Zealand being “attractive to investment”. It is well known that rates of business investment in New Zealand have been very low for a long time. Perhaps the writer had in mind non-resident purchases of New Zealand houses? If so, again it is hardly a mark of economic success to have a more secure environment, subject to the rule of law, than China. Most countries – rich, poor, and middling – probably do. And other countries have been “so slow to finally recover from the crisis”? Really? What has always been striking is quite how weak New Zealand’s performance has been, especially as it was not directly involved in the financial crisis (and associated losses) itself. The weird narrative that we’ve done well is just contradicted by the facts – unless perhaps Greece is the benchmark people have in mind,

Now, I agree with the leader writer that no doubt there will be another recession along before too many years pass, and it is wise to be fiscally cautious. But if these are the “good times” – unemployment still at 5.7 per cent, per capita incomes up only about 5 per cent over the eight years since just prior to the recession – it is scarcely an encouraging story.

The other piece that caught my eye was on the front page of the Herald’s Capital Markets supplement. In an article written by Fran O’Sullivan, Scott St John the head of investment banking firm First NZ Capital proclaims the death of distance.

The tyranny of distance has now turned into an advantage and in an infrastructural sense I hope we are bold enough and aspirational enough to capture that opportunity.

But I looked through the rest of the article, and found not a shred of argument or evidence in support of this proposition.

Yes, there was an argument for a while that falling communications costs etc would be the “death of distance”, and for some individuals that is probably so. But for economies as a whole, it just looks as though the argument, however reasonable it seemed when it was first made, was just wrong. Location and personal connections seem to be mattering more than ever. If it were not so, why would we see the average GDP per capita of big cities around the world still rising relative to those of the countries they are part of? I illustrated the point in a series of posts last week (here and here).

As a reminder, New Zealand has spent decades slipping behind the advanced country pack we once led. And there is still no sign of that turning around, despite all the “aspirational” policy initiatives successive governments have adopted. And Auckland – home of Mr St John’s business – has underperformed even New Zealand. Despite all the policy focus on Auckland, over the 15 years for which we have data per capita GDP in Auckland has been shrinking relative to that in the rest of the country, not growing.

St John cites “a few champions who are growing their businesses from New Zealand”. He offers two names. The first is Fisher and Paykel Healthcare (on whose board he sits). It seems to be quite an impressive company, but total revenues last year were $672 million. At least, that firm is highly profitable. His other example is Xero. I wish Xero well but total revenue last year was $124 million, for losses of $70 million: it is small, success (turning a profit) yet unproven, and with a fairly high likelihood that if it succeeds it will eventually be taken over and relocated abroad. In a sense, the (short) list illustrates the challenge. This remains a natural-resource oriented economy. That isn’t necessarily a bad thing, and is probably largely a reflection of location and distance.

And for all the talk of tourism – the upbeat story of the year – services exports as a share of GDP are still less than they were 15 years ago.

In fact, the latest observation was bang on the average for the last 25 years. Successful countries almost always become such, and stay such, by finding more and better stuff to sell on world markets. Even for services, we aren’t.

Sometimes, there are encouraging moments. One of those the other day was the Labour Party moving to outflank the government and propose the complete abolition of the Metropolitan Urban Limit (or restrictions in a similar guise) around Auckland. I’m not optimistic that it will all come to much – as I’ve noted repeatedly, hoping that someone can offer a counter-example, there are no cases I’m aware of of cities/countries successfully throwing off planning restrictions once they become established – but at least it seems to represent a recognition of (a) the seriousness of the problems, and (b) something closer to the root causes of the problem.

I wonder how long it will be until some political party – even some leading media outlet – might decide there is mileage in highlighting just how badly New Zealand has been doing economically over a very long time, and offer some serious grounded ideas for how we might turn that failure around. Since 1970, Statistics New Zealand data tell us that a net 940000 New Zealand citizens have left New Zealand, and even in the last 25 years we’ve seen over 500000 (net) New Zealanders leave. Sadly, it has been – and remains – a rational response to our own continuing underperformance

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6 thoughts on “Sometimes I wonder….”

Keep interest rates lower than Australia who is still pretty much our biggest trading partner. We cannot consistently have interest rates higher than our counterpart just across the Tasman. It makes our businesses uncompetitive with a higher cost structure.

It actually has nothing to do with the MUL. Its more to do with Visual Height limits of 57 sacred mounts. Mt Eden, Mt Albert, Mt Roskill, One Tree Hill, 3 Kings, Mt Wellington etc. Auckland region is already 5000skm stretched from Leigh in the north down to Pukekohe in the south. Travel distance is 129km. Compare that with Houston, which stretches from The Woodlands in the North to Texas City in the south and that is a whopping 118km(ooops it is shorter than Auckland). with 6.2 million people with a 10,000skm land area. We are full with 1.5million people. It is about density. We do not have enough height in the centre because our centre is just too small. It is ringed by scared mounts. Abolish the visual height limits and reset the density to Epsom, Remuera, Mt Eden, Mt Roskill, One tree hill, to 18 level buildings. Problem solved. Simple solution to a simple problem.

I am with GGS on that one except I think a mixture of 3-6 storey limits on the isthmus is all we would need for a long time.

Michael, speaking of low productivity have you had a chance to read Greg Clark’s review of Robert Gordon? I don’t have AER access so can’t get in. It seems that it is quite hard for productivity to grow in a services economy.

Minor point, you misrepresent the Xero figures. The numbers you gave were for 2014/15 (not last year). The revenue for 2015/16 (last year) was $207m, and a loss of $82m.

I know the government are always going to push the story that things are going well. But it seems to be reported by the MSM as well. Have MSM been convinced by the government, or do they agree? Are people’s/MSM’s perception of the economy that it is doing better than the raw numbers would suggest? Perhaps the 60%(?) of house owners have are wearing rose-tinted glasses branded “housing”?

I don’t know the answer. I hear stories occasionally that the Herald operates on an “upbeat sells papers” line, but have never been sure what to make of it. It probably doesn’t help that there isn’t much of a newsworthy alternative narrative: ie annoying but ignorable people like me make the points, but the political Opposition (any of the parties) is pretty inaudible on the structural underperformance of NZ.